Make the Expanded Child Tax Credit Permanent With This One Easy Trick
Here's how Democrats can significantly reduce child poverty over the long term
The Build Back Better Act—which passed the House by a 220-213 vote on Friday—makes important changes to the child tax credit. It extends the $3000-per-child credit ($3600 for children under age 6) through 2022. And it makes the credit fully refundable on a permanent basis. By one estimate, these changes will reduce child poverty by more than 40 percent within a single year.
Unfortunately, the $3000 credit (or $3600 for young children) won’t last long. In 2023, the credit amount will fall back to $2000 per child. And starting in 2026, due to a sunset provision in the Trump Tax Cuts and Jobs Act, the credit will fall to $1000 per child. Ideally, congressional Democrats would have agreed to make the entire child tax credit expansion permanent. They could have offset the cost by taxing unrealized gains at death, eliminating the passthrough-deduction giveaway, and raising the corporate income tax rate to somewhere in the mid- to high-20s. Alas, some Democrats decided that they would rather let millions of children languish in poverty than enact common-sense revenue-raising tax reforms.
But as the Build Back Better Act moves to the Senate, and then most likely onto a House-Senate conference to hash out inter-chamber differences, Democrats still have an opportunity to make the expanded child tax credit permanent starting in 2032—at least for children in low and middle-income families—without any further tax increases. That’s because the bill’s permanent corporate and international tax reforms and its permanent tax increases for high-income individuals raise a significant amount of revenue in “out-years” (i.e., years beyond the 10-year budget window). Under budget reconciliation rules, Democrats can use out-year revenue to offset out-year tax cuts or spending as long as the net deficit impact is neutral. Right now, though, Democrats are effectively leaving out-year money on the table.
A quick refresher on the Byrd rule
Section 313(b)(1)(E) of the Congressional Budget Act—part of what’s widely known as the “Byrd rule”—prohibits reconciliation bills from adding tax cuts or spending increases beyond the budget window unless the deficit effect is offset by pay-fors somewhere else in the bill. On its face, this requirement is quite demanding: fiscal year 2032 deficit increases must be offset by fiscal year 2032 deficit reductions; fiscal year 2033 deficit increases must be offset by fiscal year 2033 deficit reductions; and so on. As a practical matter, the Congressional Budget Office and the Joint Committee on Taxation generally don’t publish year-by-year outlay and revenue estimates beyond the budget window. But if a provision is challenged on section 313(b)(1)(E) grounds, CBO and JCT will advise the Senate Budget Committee chair on whether the deficit effect in every out-year is fully offset. Typically, the Senate Budget Committee chair will relay that advice to the Senate’s presiding officer, who will rule accordingly. If the presiding officer rules that a provision violates section 313(b)(1)(E), the provision falls out of the legislation unless 60 senators vote to waive the Byrd rule violation.
How much extra revenue do Democrats have in the out-years?
The version of Build Back Better that passed the House on Friday raises a ton of money in the out-years. Exactly how much isn’t crystal-clear because, as noted, CBO and JCT don’t publish out-year revenue estimates. But by looking at the numbers for fiscal year 2031 (the last year inside the budget window), we can get a sense of the outlay and revenue effects for fiscal year 2032.
According to CBO’s summary table, Build Back Better reduces the deficit by $162 billion in fiscal year 2031. To a first approximation, that figure reflects a $220 billion net deficit reduction from provisions in the Ways and Means Committee’s jurisdiction minus a $26 billion net deficit increase from provisions in the Energy and Commerce Committee’s jurisdiction, a $24 billion net deficit increase from provisions in the Judiciary Committee’s jurisdiction, and about $8 billion of additional spending scattered across other committees. The Judiciary Committee figure represents the deficit effect of expanding green-card eligibility, a measure that hopefully survives the Senate but faces a separate Byrd rule challenge. (For more on the Byrd rule/green card issue, see this letter—which I co-wrote on behalf of 91 other legal scholars—urging the Senate to keep the green-card eligibility expansion in.) The Energy and Commerce Committee figure largely reflects climate-change and healthcare investments that expire at the end of fiscal year 2031.
The $220 billion Ways and Means figure should be taken with a grain of salt (or rather, SALT). The bill raises roughly $40 billion per year by imposing an $80,000 cap on SALT deductions for tax years 2027 to 2030 and $76 billion in the final year by lowering the cap to $10,000. Under the House version, all those limits lapse in tax year 2032.
Subtracting out the revenue from the SALT changes and the cost of the green-card eligibility expansion, Democrats have somewhere around $120 billion per year of available out-year revenue (perhaps a bit more because the out-year spending scattered across other committees largely lapses at the end of fiscal year 2031). If they were to reinstate the $80,000 SALT cap for tax years 2032 and onwards, the available out-year revenue would rise to roughly $160 billion. If the green-card eligibility expansion falls out in the Senate, the figure would rise to more than $180 billion.
The Census Bureau estimates that in 2032, there will be approximately 25 million children under the age of 6 in the United States and 51 million children between ages 6 and 17. The cost of extending the $3000/$3600 credit to all of those children—given the $1000 credit already in place under current law—would be approximately $167 billion (i.e., 25 million x $2600 for children under 6 + 51 million x $2000 for children ages 6 to 17). The phaseout for families with adjusted gross income above $150,000 reduces that sum a bit. A phaseout with a lower income threshold would reduce the sum further. So Democrats can choose between (a) a lower income threshold for the expanded child tax credit and (b) an expanded child tax credit with roughly the same income cut-off as under current law plus a post-2031 extension of the $80,000 SALT cap. Any leftover revenue (e.g., if the green-card provisions fall out of the bill) might be used to further enhance or inflation-index the credit.
2032 is a long way away—but not that long
Legislating now for 2032 might seem rather premature, at least until the $3000/$3600 credit amount is extended for 2023 through 2031. But it would be a moral and strategic error for Democrats to pass up this opportunity.
First, child poverty post-2031 matters, even if it’s a long way away. Ideally, a child born in 2022 wouldn’t spend any of her childhood years in poverty. But a boost at age 10 is still better than a boost never.
Second, there is no assurance that Democrats will have another opportunity to enact a child tax credit expansion in the next decade. Lots of things can happen in 10 years, but it’s not so unlikely that Democrats will lose control of Congress in 2022 and that President Biden will be replaced in 2024 by a Republican who goes on to win a second term. Maybe child tax credit expansion will command bipartisan support—after all, Republicans voted to temporarily double the credit from $1000 to $2000 as part of the Tax Cuts and Jobs Act. But it would be a mistake to bank on Republicans deciding to embrace and extend one of Biden’s signature policies.
Third, if Democrats do retain control of Congress in 2022 and then try to make the $3000/$3600 credit permanent, their task will be much easier if tax years 2032 and beyond are already accounted for. Otherwise, Democrats will need to find new out-year pay-fors to offset the long-term cost, assuming that they proceed via reconciliation. And they won’t be able to rely on the already-enacted corporate and international tax provisions and the high-income individual tax increases in Build Back Better—those revenues will be, for reconciliation purposes, “lost.”
To be sure, it’s possible that Senators Joe Manchin and Kyrsten Sinema—whose votes are needed to pass Build Back Better—won’t sign on to additional out-year tax credits. To my knowledge, neither senator has said anything in public so far about the out-years; the focus has been on the 10-year number (plus specific programs and pay-fors to which those senators object). Maybe we can call it the “Manchin-Sinema Expanded Child Tax Credit”—akin to Roth IRAs and Coverdell educational savings accounts—and assure them a place in tax history?
Less facetiously, Democrats have an opportunity to transform the enhanced child tax credit from a temporary blip to a historic victory in the six-decade-long War on Poverty. They should seize the moment. In a perfect world, they would make the political sacrifices necessary to establish a permanent enhanced credit beyond tax year 2022. But if they won’t do that, then a permanent enhanced credit starting in 2032 would be a better-than-nothing consolation prize.
Two other items
In non-child tax credit news:
— The Behavioral Elasticity of Tax Revenue, co-authored with my University of Chicago colleague David Weisbach, is now out in the Journal of Legal Analysis. Read the final version here. From the abstract:
This article presents a measure of the efficiency consequences of changes to tax policies that can inform a wide range of tax law debates. Building upon recent extensions to the “elasticity of taxable income” concept, we clarify the relationship among revenue effects, administrative costs, and compliance costs. The resulting measure—the behavioral elasticity of tax revenue (BETR)—captures the change in total resources resulting from marginal changes in tax rates, the tax base, or tax enforcement. We illustrate the BETR’s utility through a series of case studies. We also show how the BETR can help policy makers select more efficient redistributive mechanisms.
— Chris Buccafusco at Cardozo Law School and I have posted a new working paper on SSRN: Framing Vaccine Mandates: Messenger and Message Effects. Download it here. Comments/suggestions appreciated. From the abstract:
In September 2021, President Biden announced that the Occupational Safety and Health Administration (OSHA) would require all employers with 100 or more employees to ensure that their workers are fully vaccinated against COVID-19 or show a negative test for the virus at least once a week. The policy has been widely characterized in the media as “President Biden’s vaccine mandate,” though it could be described with equal accuracy as “OSHA’s testing mandate” (since OSHA, rather than Biden, officially promulgated the policy, and once-a-week testing and vaccination are both valid compliance options). Some commentators have speculated that reframing the policy as a testing mandate (with a vaccination option) rather than a vaccine mandate (with a testing option) would boost public support. This study seeks to gain empirical insight into how framing effects shape attitudes toward vaccination and testing policies.
In October 2021, we presented a nationally representative sample of 1500 U.S. adults with different descriptions of the same vaccinate-or-test requirement. We find that recharacterizing “President Biden’s vaccine mandate” as “OSHA’s testing mandate” yields a substantively and statistically significant positive effect on support, boosting the policy’s net approval margin by approximately 13 percentage points. The effect of reframing is particularly strong among self-identified Republicans, who overwhelmingly oppose the policy when it is framed as President Biden’s vaccine mandate but are more evenly split when the policy is framed as OSHA’s testing mandate. Further analysis reveals that the positive effect is driven by the change in the messenger frame (i.e., switching the promulgator of the policy from President Biden to OSHA). By contrast, changing the message frame from a vaccination requirement (with a testing exception) to a testing requirement (with a vaccination exception) has little independent effect on respondents’ attitudes.
Our results suggest that messenger framing can have meaningful effects on public opinion toward a policy even after the policy is widely known. Beyond the COVID-19 context, our study points to a potential cost of presidential administration when partisan divisions are deep. Our results suggest that framing a regulatory policy as an extension of the president can elicit strong—and in this case, negative—reactions that may be avoidable if the same policy is framed as the work of a bureaucratic agency.
Happy Thanksgiving. This year, we have mRNA vaccines to be grateful for. Hopefully next year, we’ll be able to add a permanent child tax credit to that list.